Shorting the ABX - The Next Amaranth?

The now touted newest possible disaster for hedge funds is those shorting the ABX.

To simplify - the ABX is essentially a derivative index of credit default swaps on subprime mortgages.

The short bet is that as the housing market declines subprime mortgage defaults are going to take off.

So far, apparently the bet hasn't paid off and it could cost the funds. Mortgage backed spreads have stayed tight, interest rates have come down, even home building stocks have come back a bit. And, so far at least, people haven't yet started to default in droves on subprime obligations.

Those using lots of leverage on the short bet are obviously the most exposed.

The analogy to the gas market (Amaranth) may be a bit strained. This is a much larger and purportedly less volatile market than that one.

In any event, this is one trade that from a broader social point of view would not be so wonderful to see the shorts win.

Don't touch that dial.